National Bank Holdings Corporation

Good morning, everyone, and welcome to the National Bank Holdings Corporation 2024 Fourth Quarter Earnings Call. My name is Anna, and I will be your conference operator for today. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to Emily Gooden, Chief Accounting Officer and Director of Investor Relations.

Thank you, Anna, and good morning. We will begin today's call with prepared remarks followed by a question and answer session. I would like to remind you that this conference call will contain forward-looking statements, including but not limited to statements regarding the company's strategy, loans, deposits, capital, net interest income, noninterest income, margins, allowance, taxes, and noninterest expense. Actual results could differ materially from those discussed today. These forward-looking statements are subject to risks, uncertainties, and other factors which are disclosed in more detail in the company's most recent filings with the U.S. Securities and Exchange Commission. These statements speak only as of the date of this call, and National Bank Holdings Corporation undertakes no obligation to update or revise these statements. In addition, the call today will reference certain non-GAAP measures, which National Bank Holdings Corporation believes provides useful information for investors. Reconciliations of these non-GAAP financial measures to the GAAP measures are provided in the news release posted on the investor relations section of .nationalbankholdings.com. It is now my pleasure to turn the call over and introduce National Bank Holdings Corporation's Chairman and CEO, Mr. Tim Laney.

Thank you, Annalee. Good morning and thanks for joining us as we discuss National Bank Holdings' fourth quarter and full year 2024 results. I'm pleased to be joined by NBH President Aldous Bercons as well as our Chief Financial Officer Nicole Van Dennebille. We delivered solid earnings of 86 cents per diluted share during the quarter and a .4% return on tangible common equity when adjusted for the impact of the security sales. We delivered .3% annualized net interest income growth during the quarter with a strong net interest margin of 3.99%. Before handing off the call to Nicole, I will point out that tangible book value grew 11% during 2024 and we exited the year with common equity Tier 1 capital ratio of 13.2%. Nicole?

Thank you, Tim.

And to our telephone audience, please stand by. It looks like we lost the connection for our presenters.

Well, we apologize. I was not sure what happened on the line, but I was just introducing Nicole. And Nicole, I'll ask you to take it from here.

Thank you, Tim. Good morning. During today's call, I will cover the financial highlights for the fourth quarter and full year 2024 and share our guidance for 2025. Consistent with our prior practice, our guidance does not include any future interest rate policy decisions by the Fed. For the fourth quarter, we reported net income of $28.2 million or 73 cents of earnings per diluted share. During the fourth quarter, we announced a strategic sale of investment securities of approximately $130 million, which resulted in an after-tax loss of $5 million. The proceeds from the security sale will be reinvested in higher yielding securities during the first quarter of 2025. As a result of our strategic balance sheet management, our total assets ended the year at $9.8 billion. As Tim shared with you, adjusting for the one-time security sale loss, our net income increased to $33.2 million or 86 cents of earnings per diluted share. This resulted in an adjusted return on average tangible assets of .4% and an adjusted return on average tangible common equity of 14.4%. On a linked quarter basis, we grew our fully taxable equivalent pre-provision net revenue by .5% annualized, again, after adjusting for the one-time impact of the security sale. For the full year 2024, our net income totaled $118.8 million or $3.08 of earnings per diluted share. Adjusting for the impact of the security sales, net income was $123.9 million or $3.22 of earnings per diluted share. During 2024, we maintained a strong net interest margin, generated average deposit growth of 4.7%, and grew our tangible book value per share by 11%. We continue to be pleased with our bankers' commitment to growing client relationships, and we entered the new year with solid loan pipelines. We anticipate higher levels of loan demand in 2025 and are projecting 2025's loan growth to be in the mid-single digits. Fully taxable equivalent net interest margin expanded 12 basis points during the quarter to a strong 3.99%. Our bankers' disciplined efforts in repricing deposits resulted in a 22 basis point reduction in our cost of deposits, which more than offset the 7 basis point decline in earning asset yields during the quarter. As a result, fully taxable equivalent net interest income grew .3% annualized during the quarter to $92 million. As I mentioned earlier, we do not incorporate future interest rate changes in our projection, and with that in mind, for 2025, we project fully taxable equivalent net interest margin to remain in the 3.9%. Turning to credit quality, our non-performing loan ratio remains below peer averages at 46 basis points of total loans outstanding. We charged down one previously reserved credit during the quarter, resulting in 11 basis points of annualized net charge-offs for the quarter, or just 13 basis points for the year. The quarter's provision expense of $2 million was primarily driven by the quarter's loan growth and an increase in reserve requirements as a result of our CSIL modeling approach. The allowance to total loans ratio ended the quarter at .22% consistent with the prior quarter. We continue to hold $23 million of marks against our acquired loan portfolio, which adds an additional 29 basis points of loan loss coverage if applied across the entire loan portfolio. Total noninterest income for the fourth quarter was $11.1 million and included $6.6 million of pre-tax losses on the investment security sales. For 2025, we project our total noninterest income to be in the range of $72 to $77 million. Noninterest expense for the fourth quarter totaled $64.5 million and included $1.2 million of impairment from the consolidation of three banking centers. Excluding the impairment, noninterest expense decreased $0.9 million on a linked quarter basis. 2024's full-year noninterest expenses were well-managed and totaled $254 million and included $13 million of two Unifi related expenses. Noninterest expense for 2025 is projected to be in the range of $272 to $278 million and includes approximately $27 to $29 million of investment in two Unifi. In an effort to provide additional visibility, my future remarks will break out the investment in two Unifi from the core bank's expense run rates. The -over-year increase in two Unifi expense includes the onboarding of additional developers and the amortization of the capitalized assets. Excluding the increase in two Unifi related expenses, core bank noninterest expense is projected to increase 3% in 2025. The full-year effective tax rate for 2024, excluding excess tax benefits, was .5% and benefited from research and development tax credits related to the two Unifi build-out. We project 2025's effective tax rate to be around 19%. In terms of capital management, we continue to grow our excess capital and end the quarter with a strong TCE ratio of 10.2%, Tier 1 leverage ratio of 10.7%, and a common equity Tier 1 ratio of 13.2%. We project our share count to remain around $38.6 million in diluted shares outstanding during 2025. With that, I will turn it over to Alvin.

Well, thanks, Nicole, and good morning. Our strong results this quarter were driven by our focus on funding the long growth with low-cost deposits, proactively managing credit, diversifying our fee income, and creating positive operating leverage through disciplined expense management. As Nicole already mentioned, our strong liquidity and capital levels allow us to utilize Canberra deposits to reposition our investment portfolio and keep the total balance sheet below $10 billion mark, thus postponing the Durbin impact by another year. Having said that, our goal for 2025 is to grow beyond $10 billion in total assets driven by both solid loan and investment portfolio increases. Nicole already provided guidance for the long growth, and I'll just add that we projected combined cash and investment security balances to settle around 15% of the total balance sheet in 2025. In terms of the fourth quarter's recap, loan fundings during the quarter totaled a strong $480 million, which was among the highest loan production quarters in the company's history. However, we also experienced elevated levels of payouts and paydowns, which I think reflects the vibrant economic activity in our footprint markets and is a good sign for 2025. Our line realizations increased during the quarter and are showing signs of returning to their historical averages. New loan production during the quarter had a weighted average rate of 7.9%, which combined with a $3.99 percent decrease in total cost of deposits of 22 basis points drove the net margin expansion to .99% for the quarter. We are highly confident in the proactive execution of a deposit strategy. The fourth quarter's total deposit data was 44% as measured against the Fed target rate decrease, which is in line with the deposit data when the rates were increasing. Overall, as we look ahead to 2025, we remain confident in our ability to deliver strong results driven by robust loan growth and the continued expansion of our core deposit franchise. Our disciplined approach to credit remains at the heart of our strategy, ensuring we balance growth with sound risk management. We believe our focus on relationship banking continues to differentiate us and allows us to deepen our client engagement and creates long-term value for our shareholders. With that, I'll turn it back to you.

Thank you, Aldis. Well, as Nicole and Aldis have shared, we entered 2025 on solid footings. We're pleased with the level of business activity we're seeing in our markets, and we believe we're set up to have a nice year. Our two unified team continues to build the banking marketplace of the future, and the team is progressing on time and operating within budget. We began user testing in the fourth quarter, and we like what we're seeing. Finally, we continue to place a premium on maintaining optionality. We remain focused on M&A and strategic markets, and with a solid base of capital, we believe we're well positioned to take advantage of a range of shareholder-friendly actions should they come to fruition. And on that note, I'll ask our operator to open up the line for questions.

And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question. We'll now take a question from Ryan Payne with DA Davidson.

Hello, Ryan. Ryan Payne on for Jeff Rulis today. On the loan front, are you seeing any changes in the competitive environment there and any particular areas you're targeting this year?

No, I think the competitive environment has been competitive going into late 2024 already. So we're not seeing necessarily or projecting any changes in going into next year. We do see quite a bit of activity, as I mentioned, in terms of paydowns, payoffs are quite active. So we do feel like there is a good economic environment that is allowing for credit generation and people looking to do business.

If I were to add anything, I would say from a competitor standpoint, we are seeing what we would deem as even more. We pride ourselves on putting ourselves in markets with pretty rational competitors. And I would just say given the stress and uncertainty of the last 18 months, we've seen the market become even more rational around credit. So I

think that's what we've got for you, Ryan. Got it. OK. And on the credit front, is there a certain relationship that caused the rise in NPAs there or segment?

Well, maybe the way to I think I follow your question. The way to address it is if I think about industry segments and exposures we've previously noted, we continue to see weakness in the transportation space in particular. That's been if I were to point to one area that's represented a source of concern, it would be that. Now, I'll also point out that having said that, transportation exposure represents less than 2% of our total outstandings. And then I would I would tell you that the other activity we've seen in that space is of recent is actually small dollar exposure that was originated in one of our previous acquisitions. And frankly, we're working to clean that up.

Got it. OK. And last thing for me on the plan to unify expenses for this year, did I hear it was 27 million? Was that right?

Yes, that's correct. I gave a range of 27 to 29 million.

Got it. OK. Thank you. I'll step back. Thank

you, Ryan.

And we'll now take our next question from Charlie Driscoll with KBW.

Good morning. Good morning. This is Charlie on for Kelly Mata on the funding side. Deposits saw some nice relief. Any update on how you're thinking about the competition and those betas as we look through 2025?

Yeah, I'll just mention on the deposits again, we have the luxury on having the camber and move that balance on balance sheet component on and off. And we practically took down our camera deposits in an effort to accommodate the investment portfolio sale pay down for the for the quarter for the year end. If we were to exclude an average basis out, actually, core deposits grew about 40 million dollars. And you can see the 20 million of that was or half was in DDA. So we feel good about our core deposit activity and growth there. And that that continues going here in 2025. Yeah,

Charlie, I would add we feel very good about our level of Treasury management activity with our business clients. And I'm proud of our team in terms of the deposit pricing discipline and the courage it took to act on on on that deposit pricing discipline. And over the last quarter or so, it obviously is making a difference.

Makes sense. Thank you. And then you said your plan for 2025 was to go to grow through 10 billion. Can you remind us of what the expense impact is from Durbin and then any other considerations around the 10 billion threshold? And maybe what side you think you could be at to absorb the drag as well?

Thank you. Look, we we've avoided roughly a 10 million dollar charge over the course of two years, five this year, five next year by as a result of simply pushing it into 25. We we frankly managed our way through that process and we'll we'll we would expect to quickly move beyond 10 billion in assets. I've talked about the five million a year impact. Ultimately, the Durbin expense is is we're fortunate in that we do not have high consumer exposure in the Durbin area. And and so we're frankly just managing through that impact with organic growth.

Awesome, thank you. And then maybe my last question, I know you mentioned organic growth, but an acquisition could be a fast way to get scale on one possible strategy to absorb the Durbin hit. I was just wondering if you could provide any update on basic conversations there and how you're approaching your capital priorities.

Yeah, Charlie, your question is important because I think one thing we would point out is that obviously we can't provide details, but we've been examined as a regional bank now as though we were over 10 billion for the last two years. We when we received our initial charter, when we started the company, our initial regulator, the OCC required us to begin building out processes as though we were 10 billion dollars in assets day one. While that was a pain, that legacy was painful as we've approached 10 billion. It's actually made that crossover very manageable and we don't expect there's no indication that we should expect any other major expenses related to that crossover, given that we've got that infrastructure in place. Could an acquisition help dilute the Durbin impact? Yes, but it's so insignificant. I mean, we wouldn't let that drive M&A activity. We're still focused on strategic partners that share similar cultures and views toward relationship banking and we are having very constructive conversations on that front.

Awesome. Thank you guys. I'll step back. Thank you, Charlie.

And as a final reminder, that is star one if you would like to ask a question. We'll now take our next question from Andrew Leish with Piper Sandler.

Good morning, everyone. Good morning. Thanks for taking the questions here. Nicole, the margin guide, I missed it near in the 390s. Is that correct?

Yes, that is correct, Andrew.

Got it. I guess we had some nice improvement on funding costs there. Why wouldn't the full quarter effect of the last 25th rate hikes and even the one in November help push the margin a little bit higher here in the first quarter?

Yeah, I'll take that. This is all to Sandra. That's a good question and that's kind of the natural tendency here in terms of thinking. Remember the other component of VR, are we repositioning and adding back the investment portfolio, which certainly comes on at the lower yield in relation to the funding cost than a typical loan would. And so that denominator increase while we are adding numerator in terms of earning more money, the denominator increase is overcoming it and keeping an overall balance sheet, or sorry, the overall NIM in that call of 390s.

Got it. Okay, that makes sense. Even so, if we do get any more rate cuts from the Fed, I mean, how do you expect the margin would react? Would it be a slight benefit at first before there's some asset catching up? I guess, how is the balance sheet positioned right now for rate changes?

Yes, so adjusting for the impact of our security sale, we will fill our balance sheet to E. We're very close to asset neutral and we believe that any future interest rate movements up or down should not impact our margin.

Got it. Okay, that's very helpful. And let's see, the, oh, just on the expense growth, did you say it was at 3% excluding Canberra for this year? The

2025 guidance I provided for non-interest income, if you strip out the two Unifi impact, we're holding the core bank expense increase to 3%.

Gotcha. Okay. And then I know you had the friends and family launch here recently. How did that progress? And when do you think we can start seeing some revenue fall to the bottom line here?

Yeah, look, user testing is going well. A key focus has been on the quality of the integrations and I'm pleased to report that we encountered really only one partner issue and the team and the partner believe that that issue can be resolved by month in. We expect to be adding additional users here by the end of this month and we're entering phase three with Apple and Android for all of our application certifications. We are still not forecasting revenue for the year. We're in, I mean, I should suggest we expect revenue, but we're not publicly forecasting revenue for the year, which would begin to occur in the second half of this year. Got it. Very helpful. Good to hear the progress.

Thanks for the question, but I'll come back.

Hey, Andrew, before you go, we're all dog lovers here. Why don't you introduce your dog?

He's joined your conference call a few times over the years. All right. Thank you. Thank you.

Thank you. And I'm sure we have no further questions at this time. I will now turn the call back to Mr. Laney for his closing remarks.

Well, thank you. I wouldn't do this if he was actually on the line because I wouldn't want to flatter him that much. But since he's not, I will point out as it relates to 2Unify, Jeff Rulis of D.A. Davidson provided what I believe was a very solid 2Unify update that was published on January 3rd and I believe it's worth a read. So I'll call that out. And with that, say thank you, everyone, for joining today. Have a good day.

And this concludes today's conference call. If you would like to listen to the telephone replay of this call, it will be available in approximately 24 hours. And the link will be on the company's website on the investor relations page. Thank you very much and have a great day. You may now disconnect.